Are Falling Jobless Claims a Sign June’s Hiring Flurry Wasn’t a Fluke?

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Jobless claims  – which serve as a proxy for layoffs — are once again trending near a seven-year low. Before the Great Recession, weekly applications for unemployment benefits averaged approximately 320,000 due to the normal churn of the labor market, and for a majority of 2014, claims have come in near that level. In the week ended July 5, the number Americans filing initial applications for unemployment benefits decreased by 11,000 to 304,000 — a level hit only rarely in the past five post-recession years. Declining jobless claims highlight the fact that emerging unemployment is returning to acceptable levels. Or, in other words, fewer Americans are being laid off, even if the nation’s long-term unemployment level remains elevated and employers still do not have the confidence to significantly boost hiring. But while jobless claims have never stabilized below the key benchmark level of 300,000, the generally downward course charted by application numbers is evidence of ongoing healing in the labor market.

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Other evidence of labor market strength came in the form of the Department of Labor’s four-week moving average. Jobless claims provide the first look at the employment situation for any given month, but since the weekly figures can be volatile, economists use the four-week moving average to understand wider trends in employment, which are far more telling of labor market health than weekly readings. Alongside the drop in weekly jobless claims, the moving average fell to 311,500 from the previous week’s 315,000.

However, the number of workers continuing to draw unemployment benefits jumped, climbing 10,000 to a seasonally adjusted 2.58 million in the week ended June 28. Continuing claims — reported with a one-week lag — have fallen by more than 400,000 over the past twelve months.

And “the declining trend in claims is very encouraging, and is further evidence that the strong payrolls number we saw for June is not a fluke,” Moody’s Analytics senior economist Ryan Sweet told Bloomberg, the labor market is gaining momentum. This is consistent with strong gains in consumer spending.” In May, the most recently available data, American consumers spent cautiously despite stronger income growth, with personal expenditures rising 0.2 percent. Meanwhile, June’s retail sales report from the Department of Commerce — another gauge of consumer spending — rose less than forecast in June. More broadly, poor employment gains spell larger problems for the U.S. economy. The relationship between business spending, job creation, and consumer spending is a close one. U.S. businesses do not want to increase labor costs unless they are consumers will spend money on the goods and services they produce. But consumers who are not confident about their job prospects are not likely to spend beyond everyday necessities. But while consumer spending data from the past several months has not been noteworthy, the longer-term trends have been stronger.

It is also important to remember that the jobless claims measure calculated by the Labor Department’s Bureau of Labor Statistics is what is known as a low impact indicator compared with its monthly Employment Situation Report. While the general downward trend in jobless claims can be termed as a positive sign for the labor market, jobless claims numbers are a leading economic indicator, and therefore only offer indirect clues about the pace of hiring — the most important part of the labor market story. While “inroads” into unemployment are being made, progress is still slow. In other words, job growth may no longer be bad, but it is still sluggish. If initial claims for unemployment benefits defined the whole labor market story than the narrative of the jobs recovery would be easy to summarize: progress is steady, or at least, the labor market situation is not worsening. As jobless claims continue to decrease, the labor market will further tighten, meaning employers will theoretically be under more pressure to boost wages. And typically, initial jobless claims wane before employment growth can accelerate. Of course, initial applications for unemployment benefits have been trending down for more than a year, but hiring gains have been far less consistent.

It is an indisputable fact that the 288,000 jobs U.S. employers added to payrolls last month is good news, and it is encouraging that the unemployment rate is well below the 7.9 percent rate with which the United States began 2013. The economy created far more jobs than the 215,000 that economists expected, and for the past three months job creation has averaged 276,000 positions per month. More importantly, June represented the fifth consecutive month in which job creation surpassed 200,000 — a level considered to be an important benchmark of economic health. June’s employment gains pushed the total new of jobs created in 2014 to 2.495 million — the highest of the recovery. Last month’s two percentage point decrease in the headline unemployment rate was also an indication of labor market improvement. In recent months, especially April, the jobless rate has ticked down generally because large numbers of Americans have given up the job hunt and dropped out of the labor force, which is the basis for the unemployment calculation. However, the unemployment rate fell from 6.3 percent to 6.1 percent in June because 325,000 fewer people were unemployed and 407,000 more people had jobs, not because more job seekers had given up their search.

The last time the headline unemployment rate was so low was September 2008, when Lehman Brothers went bankrupt and signs of coming economic trouble were emerging. But the labor market is now much weaker than it was in September 2008. American job seekers may not be as disheartened at their employment prospects as they were earlier this year, but there is still a problem: “shadow unemployment.” In press conference following the June policy-setting meeting of central bank’s Federal Open Market Committee, Federal Reserve Chair Janet Yellen explained that “a portion of the decline we’ve seen in the unemployment rate probably reflects a kind of shadow unemployment or discouragement.” And for federal reserve economists the key question about the economic recovery is whether the millions of American workers on the fringes of the labor force will be able to return. Last month, the labor force participation rate remained flat at 62.8 percent, the lowest level on record since the 1970s.

Together, declining layoffs, payroll growth, and the falling unemployment rate indicate economic growth will strengthen in the later half of the year. Yet June’s weaker retail sales report did temper expectations for a rebound in economic growth this quarter. However, employment growth could spur the wage growth needed to accelerate spending consumer spending, which in turn, will propel greater economic expansion.

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